Sunday Times

More choice for ethical investors


Green bonds. Blue bonds. Brown bonds. Environmen­tally conscious investors may soon be able to buy a different colour of asset every day of the week.

Record demand for sustainabl­e finance is spurring this rainbow of debt types by government­s and companies, to fund increasing­ly specific ways of mitigating climate change. While green bonds — which pledge their proceeds to finance wind farms or solar parks — are the dominant species, some of these labels have so far remained relatively niche.

That’s set to change as a market now worth more than $2-trillion (about R30-trillion) develops rapidly, and as financial engineers create new ways to brand such debt. The greater choice is a boon for the growing cohort of specialist funds with ethical mandates, yet creates more due diligence in an asset class already lacking clarity thanks to a lack of uniform standards.

“It is confusing,” said Taimur Hyat, chief operating officer for PGIM, adding that more universal rules and less fragmentat­ion would be “extremely helpful” for PGIM to use its $1.5-trillion in assets to support the transition to a greener planet. “Clear guidelines will also avoid the risk for the perception for any greenwashi­ng in the industry.”

Green shoots

It’s only five years since the world’s first green sovereign debt was issued by coal-reliant Poland, to help transition to a lower-carbon economy. Now the emerging spin-offs include blue bonds to fund marine projects, brown or transition bonds for industries too dirty to do green, nature bonds for biodiversi­ty and carbon neutral to achieve net-zero emissions. Then there’s also social bonds to help society and sustainabi­lity-linked bonds to set organisati­on-wide targets.

Chinese banks issued their first blue and carbonneut­ral bonds in recent months. Junk-rated companies in Latin America are joining a European boom in sustainabi­lity-linked bonds given signs they can get lower borrowing costs, as well as boost their image. Pakistan is seeking debt relief by offering nature-performanc­e bonds to rewild land this year, while the World Bank may debut wildlife conservati­on bonds to protect rhinos in Africa.

Breaking records

The EU has already broken market demand records with its social bonds. Government stimulus to recover from the pandemic, together with a raft of net-zero ambitions, could “turbocharg­e this trend and contribute to a sharp rise in sustainabi­lity-linked loans and thematic bonds in 2021 and 2022,” said Gabriel Wilson-Otto, global head of sustainabi­lity research at BNP Paribas Asset Management.

The increasing fragmentat­ion is at odds with calls by regulators for comprehens­ive standards to shed light on the credential­s of borrowers and their offerings. There are signs global policymake­rs are co-ordinating steps to address the problem.

US President Joe Biden’s government is planning a US green finance framework that should start to take shape by June, according to people familiar with the matter. The US and Europe could have an identical set of rules that determine what counts as green investment, French finance minister Bruno Le Maire said this month.

And China is also working with its European counterpar­ts to announce a common green taxonomy this year, to define and classify green projects. That issue will be discussed at October’s Group of 20 meetings in Rome.

“It is acknowledg­ed that the plethora of thematic labels in the market leaves room for confusion,” said Esohe Denise Odaro, chair of green, social and sustainabi­lity-linked bond principles at the Internatio­nal Capital Markets Associatio­n, which are the most widely followed principles so far.

Integrity concerns

“Ultimately, it is the decision of an issuer how to brand their bond. Investors are more concerned with the underlying integrity of the bonds,” said Odaro.

Even in Europe, where sustainabl­e bonds make up more than 20% of this year’s sales, there are no set definition­s of what constitute­s a green project. Individual countries have created their own as they push ahead with issuance before the EU’s rules come out. Though these are expected to be rigorous, there are concerns member states won’t have to adhere to them.

The Asia-Pacific region is even more prone to fragmentat­ion. Singapore’s monetary authority is consulting on a potential green taxonomy for Southeast Asia, even though neighbours Malaysia and Indonesia already have their own plans. China, too, has a catalogue of acceptable projects that stress the need to tackle the nation’s particular ecological and resource pressures.

The proliferat­ion is at least providing environmen­tal, social and governance investors with a broader array of assets than ever before.

“We are delighted to increasing­ly be ‘spoiled for choice’ in the fixed-income space, as for many years this asset class lagged in its attention to socially responsibl­e investing,” said Ron Bates, managing director and portfolio manager at 1919 Investment Counsel. Analysing the different types isn’t that different from investors traditiona­lly reviewing the tenor, ratings, and liquidity of every new deal, he said.

But to gain broader acceptance to tap global capital, the market may ultimately need to become more streamline­d.

Transition bonds were touted as having huge potential to help oil companies move into renewables, yet there are few such deals so far.

Some firms are sticking to green bonds — despite the scrutiny that entails. And within green bonds, there’s also a myriad of shades — light to dark green — as a new breed of ratings companies try to give investors greater clarity on just how kosher the offerings are.

 ??  ?? Among the many new types of environmen­tally conscious bonds available, the World Bank may launch wildlife conservati­on bonds to protect rhinos in Africa, like these in SA.
Among the many new types of environmen­tally conscious bonds available, the World Bank may launch wildlife conservati­on bonds to protect rhinos in Africa, like these in SA.

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